Global Manufacturing Outlook

Global Manufacturing Outlook

Competing for growth: How to be a growth leader in industrial manufacturing

KPMG International

About the authors

Doug Gates

Global Sector Chair, Industrial Manufacturing and Global Head of Aerospace and Defense KPMG International T: + 1 404 222 3609 E: dkgates@

Doug has over 30 years of experience both in consulting and industry positions. Currently, Doug leads the delivery of major operational improvement projects across a variety of industrial companies. Doug is also the US Leader for KPMG's Innovation and Engineering service area. Throughout his career, Doug has focused on a broad set of major industrial clients, providing valuable advice in the areas of engineering, operations, outsourcing and IT transformation. Doug's industry experience includes over 20 years at a major aerospace and defense company in various Program Management and IT positions.

"Manufacturers are going

to face really fierce competition over every scrap of market share available and there will certainly be winners and losers."

Tom Mayor

Principal, Strategy Practice Industrial Manufacturing KPMG in the US T: + 216 875 8061 E: tmayor@

Tom focuses on supporting industrial manufacturers in their supply and manufacturing strategy, operations turnaround, purchasing and supply base management. With 25 years of consulting experience, Tom's clients represent a broad range of discrete products industries with a focus on aerospace, industrials, construction products and automotive. Tom frequently participates as a panelist and speaker on manufacturing strategy at prominent industry and business conferences.

"Manufacturers must start

thinking about how they can add new pools of value to their customers and then leverage all of the technologies at their disposal to rapidly deliver on that value."

Erich L. Gampenrieder

Global Head of Operations Advisory and Global Head of Operations Center of Excellence KPMG International T: + 49 89 9282 1700 E: egampenrieder@

Erich leads KPMG's Global Operations Advisory Practice and Global Operations Center of Excellence. During his almost 20 years of experience, he has been responsible for high profile cross-border programs for a number of Fortune 500 companies in the industrial, high tech, chemicals, healthcare and consumer industries. Prior to joining KPMG, Erich led the Operation Consulting practice of a Big Four firm in Germany and was a partner in Accenture's global Operations / Supply Chain practice. Erich joined the consulting industry following a 12-year career with the German Army where he served as an Electronic Warfare Officer.

"The best way to reduce the

risk of supply chain failure is by achieving greater visibility, and managing it cross-functionally deeper into the end-to-end supply chain."

? 2016 KPMG International Cooperative ("KPMG International"). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.

Contents

There will be winners and losers

02

New geographies coming into view

08

Investing into new products and services

13

Leveraging the supply chain for growth

19

Two big questions about growth

28

Key takeaways

30

About the survey

31

Methodology

This report is based on a survey of 360 senior executives conducted in early 2016 by Forbes Insights. Respondents, who represented six industry sectors (Aerospace & Defense, Automotive, Conglomerates, Medical Devices, Engineering and Industrial Products, and Metals), were fairly evenly distributed between the Americas, Europe and Asia.

To support the survey data, KPMG International conducted a series of interviews with leading manufacturers around the world. Their experiences, combined with insights from KPMG professionals and sector leaders, provide valuable context for today's manufacturers.

? 2016 KPMG International Cooperative ("KPMG International"). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.

CHAPTER

01

There wil be

winners and

losers

Manufacturers are highly focused on achieving new growth; many expect to be aggressive in their search for new opportunities. Yet with limited baseline growth expected in most markets, manufacturers will need to either invest into new technologies in order to `grow the pie' or resort to a brutal competitive fight to steal market share away from rivals. The only certainty is that there will be winners and losers.

Focus on growth

Every company wants profitable growth. But according to our data, today's manufacturers are much more focused on driving new growth than ever before.

The data tells a compelling story. Whereas 62 percent of respondents said that growth was a high or extremely high priority for their organization in the past, 74 percent said it will be a high priority over the next 2 years; 31 percent said it will be an extremely high priority over the next 12 to 24 months.

Manufacturing executives also seem to recognize that they will need to fight for their growth. Many plan to be rather aggressive in the pursuit of their growth objectives. More than half of the respondents to our survey categorized their growth strategies as `aggressive' and more than one-in-six said their growth strategy would be `very aggressive'.

In a trend that plays out across the survey results, Asia showed the highest tendency towards aggressive growth strategies.

2

KPMG's Global Manufacturing Outlook 2016

? 2016 KPMG International Cooperative ("KPMG International"). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.

Growth becomes an extremely high priority

Please rate the priority for exploiting opportunities for growth (over the past 12 to 24 months and in the next 12 to 24 months).

44% 43%

31% 23%

31% 18%

Anyone waiting for a slow-down in the level of competition coming from Asia will be disappointed.

Doug Gates Global Sector Chair, Industrial Manufacturing and Head of Aerospace and Defense

3% 1%

Not a priority at all

5% 2%

Low priority

Medium priority

High priority

Past 12 to 24 months

Next 12 to 24 months

Note: Percentages may not add up to 100 percent due to rounding. Source: Global Manufacturing Outlook, Forbes, 2016

Extremely high priority

Japanese respondents, in particular, reported taking a highly aggressive approach; 41 percent of Japanese respondents said they would be very aggressive, compared to 11 percent of US respondents and just 8 percent of German respondents. More than a quarter of China's respondents also said they would follow a very aggressive growth strategy.

"Anyone waiting for a slow-down in the level of competition coming from Asia will be disappointed," notes Doug Gates, Global Sector Chair, Industrial Manufacturing and Head of Aerospace and Defense. "Asian manufacturers clearly expect to step up their efforts to capture new market share and grow their bottom line and that will mean even stiffer competition going forward."

How they are doing it

According to our survey, manufacturers plan to make significant and often fundamental changes to their business in order to drive future growth. More than 80 percent of all manufacturers said they expect to change the range of products and/or services they offer over the next 2 years. Ninety-two percent said they expect to enter new geographic markets to drive growth.

Eight-in-ten respondents also said that they would enter into new sectors to achieve growth. "We have seen manufacturers make significant investments into new businesses, models and technologies that help them expand their footprint into new sectors," adds

KPMG's Global Manufacturing Outlook 2016 3

? 2016 KPMG International Cooperative ("KPMG International"). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.

Manufacturers are making big moves to achieve growth

To what extent will your organization do the following in the next 12 to 24 months?

Change the range of products you offer

Change the range of services you offer

Enter new geographic markets

Enter new sectors

16% 11% 8%

19%

45% 39%

40%

49%

36%

56%

31%

49%

Not at all

To some extent Significantly

Note: Percentages may not add up to 100 percent due to rounding. Source: Global Manufacturing Outlook, Forbes, 2016

Tom Mayor, Principal, Strategy Practice, KPMG in the US. "From automakers investing into mobility platforms to defense contractors investing into commercial cyber security services, manufacturers are looking for ways to remain relevant to their customers while defending against potential disruptors and disruptive business models in their core sectors."

Interestingly, respondents were much more likely to show a strong preference for organic growth to achieve their growth priorities. In fact, respondents were more than 50 percent more likely to note a preference for organic growth over M&A activity (61 percent versus 40 percent respectively). At the same time, Asian respondents reported the highest preference for M&A activity: 56 percent of China's respondents

said they would use M&A to address their company's growth priorities and 53 percent of Japan's respondents said the same.

Yet while manufacturers may show a preference for organic growth, our survey reinforces the fact that they are not willing to sacrifice speed. More than two-thirds of respondents said they expect to see results from their growth initiatives in less than 3 years.

"Everyone says they expect to grow their market share and everyone says they plan to be aggressive in their strategies, yet there are no indications that the size of the market is going to increase dramatically over the coming years," says Doug Gates. "There are going to be really fierce competitions fought over every scrap of market share available and there will certainly be winners and losers."

4

KPMG's Global Manufacturing Outlook 2016

? 2016 KPMG International Cooperative ("KPMG International"). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.

A preference for organic growth

To what extent will you be addressing your company's growth priorities through: Mergers and acquisitions of other organizations 3% 18%

40%

39%

Organic investment (including increase in R&D) 1% 4%

61%

34%

Not at all

To some extent

Predominantly

Source: Global Manufacturing Outlook, Forbes, 2016

Don't know

What's

the point?

Manufacturers are optimistic about growth but, without overall market growth, competition will become intense

What did manufacturers say? -- 65% were confident about their

company's growth prospects

-- 74% said growth will be a high priority for the next two years

-- More than 1-in-6 will be very aggressive in their growth strategy

How are leading manufacturers responding? -- Evaluating their customer and

business segments, products,

services, regions and channels to understand the elasticity in each of their markets

-- Reassessing the long-term market outlook to ensure their business objectives align to future growth opportunities

-- Creating a demand-driven and responsive business model that provides flexibility and agility to respond to increased (even unpredicted) demand and market disruptions

KPMG's Global Manufacturing Outlook 2016 5

? 2016 KPMG International Cooperative ("KPMG International"). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.

The strategic view

By Dr. Nicholas Griffin

Head of the KPMG Global Strategy Group KPMG International and Partner KPMG LLP (UK)

KPMG International's Global Manufacturing Outlook has highlighted the challenges faced by manufacturers in achieving new growth.

I believe that sector convergence is setting industries and organizations on multiple collision courses, creating both opportunities and threats in the shape of new markets, channels, technologies, propositions and behaviors. As has always been the case, disruption creates opportunities for those with the vision, will and skill to move quickly.

As the lifespan of business models reduces, the task of allocating capital and generating return on investment is becoming more challenging. Organizations are under pressure to be more agile and efficient with greater control over strategy and operations. This requires more effort to be put into achieving the alignment of financial, business and operating models.

As a result, manufacturers need to be bolder in their agenda, setting clearer growth objectives and more aggressively focused on their innovation strategies. But accelerating growth through innovation requires a clear vision for the future. Leadership needs to understand and better predict trends; the correct portfolio of products, services and markets will need to be identified; and -- based on this information -- investments into R&D will need to be concentrated on the opportunities that best align with the growth and portfolio ambitions of the organization.

In this environment, the ability to collaborate with new and traditional players will be increasingly important. Disruptive business models tend to use technologies, knowledge and channel strategies from more than one sector and then combine them to create new offers, dis-intermediate, and pull in new customers. Organizations are starting to realize that they do not have the resources, capabilities, agility and risk appetite in-house to create and launch new models.

Speed to market, new ideas and innovative capabilities are likely to characterize the next wave of growth but manufacturers will need to figure out how best to embrace and execute.

6

KPMG's Global Manufacturing Outlook 2016

? 2016 KPMG International Cooperative ("KPMG International"). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.

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